Oct. 19 (Bloomberg) -- Petrobras Argentina SA’s dollar
bonds, beaten up on concern the government would block debt
payments, now look irresistible trading at the biggest discount
to its Brazilian parent since June.

Yields on the bonds due 2017, after surging 27 basis points
last week, or 0.27 percentage point, have dropped 26 basis
points this week, part of a rebound in Argentine assets sparked
by growing confidence that President Cristina Fernandez de
Kirchner won’t force issuers to repay overseas debt in pesos.
The rally has narrowed the yield gap with similar-maturity debt
from Rio de Janeiro-based Petroleo Brasileiro SA to 146 basis
points from 165 basis points last week, when Fernandez refused
Chaco province’s request for the dollars it needed to pay local
debt.

Petrobras Argentina’s borrowing costs are falling faster
than the average for Argentine companies as the oil producer’s
debt is backed by its Brazilian parent, giving investors more
confidence the notes will be repaid, according to Capital
Markets Argentina. Average yields on international government
bonds have dropped seven basis points this week to 10.56
percent, JPMorgan Chase & Co. data show.

Petrobras Argentina’s bonds are “guaranteed by Petrobras
Brazil and it’s been punished, so that has created an
opportunity,” Noelia Lucini, a portfolio manager at Capital
Markets, said in a telephone interview from Buenos Aires. “The
news in the last two weeks aroused uncertainty.”

Brazil Guarantee

A press official at Buenos Aires-based Petrobras Argentina
who asked not to be identified in accordance with company policy
declined to comment on the bonds.

Bonds of Brazil’s state-controlled oil company, known as
Petrobras, are rated A3 by Moody’s, three steps above investment
grade and the same rating as the 2017 bonds issued by its
Argentine unit.

The $300 million of notes due in 2017 are supported by a
purchase agreement provided by Petrobras, which requires the
parent company to pay bondholders in case of a default and “is
designed to function in a manner similar to a guarantee,”
according to the bonds’ prospectus.

The backing should keep the borrowing costs of Petrobras
Argentina, the nation’s fourth-largest oil producer, low, with
yields of about 50 basis points more than those of the parent
company on average, according to Jim Harper, director of
corporate research at BCP Securities LLC.

Currency Restrictions

Moody’s lowered Petrobras Argentina’s outlook to negative
on Sept. 28 after doing the same for the Argentine government,
citing Fernandez’s “haphazard policies.” A month earlier, the
company’s rating had been cut to B1, reflecting the risk of
further government intervention in the oil industry following
the expropriation of oil-producer YPF SA in April.

Since her re-election a year ago, Fernandez banned dollar
purchases for savings, real estate and the repayment of debt
issued under local law by provinces and companies in a bid to
slow capital flight and preserve foreign reserves.

Argentine corporate debt lost 1.04 percent last week, the
biggest weekly loss since June 29, according to JPMorgan’s CEMBI
index. The selloff also spread to local and international law
government bonds.

An investment surge into emerging-market notes in September
on the back of stimulus measures by policy makers in the U.S.,
Europe and Japan means that some bondholders are less likely to
understand the terms of their debt contracts, according to Jack
Deino, a portfolio manager at Invesco Inc.

Money managers increased their investments in emerging-market bonds by $1.9 billion in September to $6.5 billion,
according to research company EPFR Global.

‘Bite You’

“Half the guys that are buying these deals are not even
reading the indentures or the covenants or the prospectuses or
anything,” Deino said at Fitch Ratings’ Fifth Annual Emerging
Markets Conference in New York on Oct. 16. “That can come back
to bite you.”

In addition to Chaco’s $26.7 million of bonds due in 2015
and 2023, other securities subject to the measures include $96.7
million of Tucuman province bonds due in 2015 and 2020 and $41.4
million of debt sold by the province of Formosa due in 2022,
according to Buenos Aires-based research company Economia &
Regiones SA.

Chaco, a soy bean-producing region in the north of
Argentina, will swap its dollar-denominated debt for peso bonds,
Governor Jorge Capitanich said in an Oct. 17 interview on CN23
while recommending that other provinces follow his lead.

Provinces Cut

Moody’s lowered the credit ratings for Chaco, Formosa and
eight other provinces and municipalities on Oct. 17, citing
difficulties in obtaining foreign currency. The ratings company
cut the foreign-currency credit ratings to Caa1, seven steps
below investment grade, for the provinces of Buenos Aires,
Cordoba and Mendoza, as well as the city of Buenos Aires.

Argentina made a $200 million debt payment Oct. 17 on
domestic law bonds due 2017, Fernandez said that day. The
Argentine government and issuers that sold bonds under
international law can still get dollars to repay creditors,
according to the central bank.

With the lowest yields among 34 Argentine corporate bonds
tracked by Bloomberg, Petrobras Argentina’s bonds aren’t paying
investors enough to offset the risk associated with investing in
Argentina, according to Mario Rappoport, a managing director at
Gleacher & Co.

Lowest Yields

“In Argentina, you have headline risk and you have it
constantly,” Rappoport said in a telephone interview from New
York. “I understand it’s Petrobras, fully owned, but at this
spread, it doesn’t make that much sense to take the risk.”

The gap over Petrobras’s bonds due in 2018 soared to 636
basis points in April, when Fernandez seized a controlling stake
in YPF from Madrid-based Repsol SA. That’s a signal that
investors should demand an interest rate of at least 225 basis
points more than that of the parent company before buying
Petrobras Argentina’s bonds, Rappoport said.

The extra yield investors demand to hold Argentine
government dollar bonds instead of U.S. Treasuries rose six
basis points, or 0.06 percentage point, to 851 basis points at
12:36 p.m. in Buenos Aires, according to JPMorgan’s EMBI Global
index.

The cost of protecting Argentine debt against non-payment
for five years with credit-default swaps rose eight basis points
to 979 basis points, data compiled by Bloomberg show. The swaps
pay the buyer face value in exchange for the underlying
securities or cash if a government or company fails to comply
with debt agreements.

Weaker Peso

Investors who own Petrobras’s securities should consider
switching into Petrobras Argentina’s bonds, according to BCP’s
Harper. The Argentine unit’s notes are as safe as those of the
parent and offer a higher yield, according to BCP’s Harper.

“You’ve got to emphasize this is Petrobras risk,” he said
by telephone from Greenwich, Connecticut. “It’s not Argentina
risk. To the extent that that spread has widened, it’s even more
compelling to swap from one into the other.”